Don't worry: it's worse than you think

David Hellier
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MERVYN King had just two words to say to those teenage scribblers in the City who have been getting carried away about the prospect of interest rates being raised soon: calm down.<br /><br />The Bank of England governor, introducing the much anticipated Inflation Report, argued that although an imminent VAT rise and the recent depreciation of sterling may have an upward effect on inflation, that was more than offset by spare capacity in the economy.<br /><br />King&rsquo;s view is that inflation is likely to be below the set target of two per cent than above it in the medium-term, which means that he&rsquo;ll soon be forced to write another letter of explanation to the chancellor.<br /><br />As far as the markets are concerned, interest rates are not likely to be raised any time soon.<br /><br />Those analysts who forecast a rise in rates in the first quarter of next year are likely to be disappointed.<br /><br />King began his remarks by noting that gross domestic product is six per cent below its peak and that manufacturing output is more than 10 per cent down on a year ago, while unemployment, as yesterday&rsquo;s figures reminded us, continues to grow.<br /><br />Given that outlook, King, who is revelling in the kudos of being the Conservatives&rsquo; choice for the City&rsquo;s top man, couldn&rsquo;t quite understand the City&rsquo;s surprise at last week&rsquo;s Bank decision to increase its quantitative easing programme by &pound;50bn.<br /><br />In fact, part of the City&rsquo;s surprise at the decision to extend quantitative easing is down to the fact that nobody really knows yet whether it is working or not.<br /><br />However that debate pans out, King says he is &ldquo;very conscious that this extreme degree of policy stimulus will need to be withdrawn&rdquo; at some point. Yesterday&rsquo;s pronouncements make that point in time later than we previously imagined.<br /><br /><strong>REED&rsquo;S CONTROVERSIAL CASH BOX</strong><br />The recent &pound;830m unexpected cash raising from Reed Elsevier, the Anglo- Dutch publishing group, continues to irritate in the City.<br /><br />Reed recently surprised its investors by announcing an &pound;800m equity placing along with a first-half profits announcement.<br /><br />The group used the controversial &ldquo;cash box&rdquo; method of raising new funds, avoiding the need to respect pre-emption rights and a lengthy conventional rights issue procedure.<br /><br />Under listing rules a &ldquo;cash box&rdquo; deal can add as much as 10 per cent to a group&rsquo;s equity without pre-emption if the cash call comes no more than six months after a recent acquisition. (In this case, Reed stretched the Association of British Insurers guidelines to the limit, since its &pound;2.3bn Choicepoint acquisition closed in December last year).<br /><br />An unflattering research note out yesterday from Bernstein Research argues it is still not clear why Reed decided on the placing and it calls on the group to be clearer about strategy going forward.<br /><br />Meanwhile, some of Reed Elsevier&rsquo;s larger investors are still miffed by the way the placing was handled. &ldquo;Anybody away for the day missed the chance to participate,&rdquo; said one shareholder, &ldquo;meaning they were diluted.&rdquo;<br /><br />New chief executive Ian Smith may have some work to do to get shareholders onside.<br /><br /><br /><strong><br />&bull; Allister Heath is away</strong>